COST ENGINEERING

Prepared by

Engr. Dr. CHARLES MBELEDE

FNSE, FACostE, FIEE, FCIBSE, FCCM, FIET, MASME, MAPM
Chartered Engineer / Project Manager
Accredited Senior Valuer / Cost Engineer
[email protected]

CHARTERED ENGINEERS AND PROJECT NANAGERS

THE NIGERIAN SOCIETY OF ENGINEERS
COMPULSORY REFRESHER COURSE
FOR PROSPECTIVE CORPORATE MEMBERS
31, Ogunlana Drive
P. O Box 6455 Surulere, Lagos
Tel: 01-4700032, 08055237344
E-mail: [email protected]

2 OLAYEMI STREET (2ND FLOOR)

OFF NNOBI STREET
P.O. BOX 6455
SURULERE
LAGOS, NIGERIA
TEL. 234-1-4700032 234-1-5456054 234-1-830695, 08042180464
E-mail [email protected]

OCTOBER 2010

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 COST ENGINEERING

Revised and updated by

Engr. Dr. Akindele Folarin Alonge

B.Sc, M.Sc (Ibadan) PhD (Ilorin), Cert in Adv Leadership (USA), Cert in
Entrepreneurship & Dairy Value Chain (Netherlands), R. Eng, FNIAE, MNSE, MSESN,
MNIFST, MASABE, MCSBE, MPASAE, MWASAE, MNAAN, MNIM,
Dept of Agricultural and Food Engineering
University of Uyo, Uyo, Akwa Ibom State, Nigeria

Registered Engineer/Associate Professor

[email protected]

Objectives of the course

To have a clear understanding of what is involved in cost engineering and analysis.
To learn the principles and basic concepts of cost engineering
To learn different emerging techniques in cost engineering

Target Audience
- Industries
- Construction Engineers
- Valuers
- Project managers
- Procurement officers
- Engineering planners
- Plan implementers
- Performance Assessors
- Administrators

Learning Outcomes
Upon satisfactory completion of the course, participants should be able to understand
and apply several major areas of knowledge and skills in Cost Engineering

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COURSE CONTENT
INTRODUCTION
• What Is Engineering?
• What Is Cost Engineering?
WHO IS A COST ENGINEER
• The fundamental tasks
WHAT IS FINANCIAL MANAGEMENT?
• Why Cost Engineering is Important
THE INTERNATIONAL COST ENGINEERING COUNCIL (ICEC)
• The Institute of Appraisal and Cost Engineers (IA&CE) Nigeria
• Major objectives of ICEC
• International Network
• Key Functions of Cost Engineers
SCOPE
Part I Supporting Skills and Knowledge
Part II Cost Estimating and Cost Control
Part III Planning and Scheduling and Project Management
Part IV Economic Analysis and Business Planning
THE DIVERSE WORKS OF COST ENGINEERS
 CE Information
COST PLAN
• Scheduling
• Risk Assessment
TIME VALUE OF MONEY
• Equivalence
COST INDEXES
ESTIMATING VERSUS BIDDING
 Estimating
 Bid process
 Competitiveness
DUTIES AND RESPONSIBILITIES OF THE ESTIMATOR
ESTIMATING AND BID PROCESS
DIRECT JOB EXPENSES
ACCURACY
COST CONTROL
LIFE CYCLE COSTING
Checklist for Life Cycle Costing
DIRECT AND INDIRECT COSTS

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1.2 INTRODUCTION

1.3 WHAT IS ENGINEERING?

Engineering is the discipline, art, science and profession of acquiring and applying technical,
scientific and mathematical knowledge to design and implement materials, structures,
machines devices, systems and processes that can safely realize a desired objective or
invention for the benefits of mankind.

Engineering is a wealth creating profession. It is the art and science of harnessing scientific
knowledge for the benefit of mankind. The 21st century engineering is at the cutting edge of
modern technology, therefore for cost effectiveness cost competitiveness, the engineer
must practice and optimize the science and art of comparing and contrasting for full
realization of the best option(s) at all times.

2.1 WHAT IS COST ENGINEERING?

Cost engineering is an area of engineering practice concerned with the "application of
scientific principles and techniques to problems of cost estimating, cost control, business
planning, management science, profitability analysis, project management, planning and
scheduling.

2.2 A COST ENGINEER

A cost Engineer is by education, training and professional experience, competent to
develop and make practical use of the principles of engineering cost management
which embraces activities such as cost estimating, cost control, value engineering,
planning scheduling, construction management, investment appraisal, risk analysis,
conceptual studies, profitability analysis of engineering projects and processes. The cost
engineer is a qualified professional dedicated to total cost management over the life cycle
of a project, facility or manufacturing operation.

The purpose of cost engineering is to determine standard cost for execution of works,
quotations, cost control, cost assessment and cost management. Cost must be calculated
based on the engineering facts by account. Allocation and distribution in most cases are
not valid. Sound mathematics and correct procedures are necessary for developing cost
estimating systems, however it is more important for cost engineers and users of cost
information to understand how costs are developed.

Requirements of Cost Engineers

- Engineering degree
- Training in Engineering Management
- Training in engineering economics
- Passion for mathematics and accounting
- Project management etc

2.3 THE FUNDAMENTAL TASKS

These are fundamental tasks which may be undertaken by different groups in different
organizations, but the term cost engineering implies that they are undertaken throughout
the project life-cycle by trained professionals utilizing appropriate techniques, cost models,
tools and databases in a rigorous way, and applying expert judgment with due regard to the

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 specific circumstances of the activity and the information available. In most instances, the
output of a cost engineering exercise is not an end in itself but rather an input to a decision
making process.

3.2 WHAT IS FINANCIAL MANAGEMENT?

Financial Management can be defined as:
The management of the finances of a business /organization in order to achieve financial
objectives

Simply put:
Financial management is the art and science of money management. Financial management is
important at all levels of human existence because every entity needs to look after its
finances.

3.3 WHY COST ENGINEERING IS IMPORTANT

Engineering and Construction Industry may be classified in economic terms as a capital
goods industry because the benefits of its products cut across all spheres of human
endeavours. No one who has responsibility for managing major, complex, high-tech
programmes with a high development content will dispute the importance of the cost and
financial aspects of the work, or the particular difficulty of assessing and controlling costs.
Cost remains a constant source of concern in virtually all engineering or construction
projects as shown thus:
When considering different technical options.

• In establishing budgets
• In conducting cost/technical trade-offs
• In the submission and evaluation of price proposals
• In preparing for contract negotiations and
• In assessing the cost impact of introducing changes to
existing designs.

It is vital to understand that the huge investment on engineering and construction

industry demand comfort, reliability economy and Total Cost Engineering Management
(TCM) from initial conception to final completion. This is to ensure that as far as
reasonably practicable that the project is realized with Quality, Time and Cost targets.

4.2 THE INTERNATIONAL COST ENGINEERING COUNCIL (ICEC)

The International Cost Engineering Council (ICEC) is an nonpolitical and nonprofit
worldwide organization which was founded in 1976 with the object of promoting
cooperation between national and multinational cost engineering, quantity surveying and
project management organizations worldwide for their mutual wellbeing and that of their
individual members.

ICEC member societies are located in more than 40 countries and have chapters or
sections in many additional countries.

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4.3 THE INSTITUTE OF APPRASIAL AND COST ENGINEERS (IA&CE) NIGERIA
The Institute of Appraisers and Cost Engineers (IA&CE) a division of the Nigerian
Society of Engineers is member institute of the International Cost Engineering Council
(ICEC). The IA&CE is dedicated to 21st Century Total Cost Engineering Management.

4.4 MAJOR OBJECTIVES OF ICEC

To encourage promote and advance the sciences and arts of the cost engineering,
quantity surveying and project management for the public good, worldwide.

4.5 INTERNATIONAL NETWORK

ICEC is a worldwide confederation of cost engineering, quantity surveying and project
management societies which acts to promote worldwide exchange of cost engineering and
project management information and experiences.

4.6 THE KEY FUNCTIONS OF COST ENGINEERS

The Key functions of Cost Engineering (CE) as defined by the International Cost
Engineering Council (ICEC) are as shown thus:

To provide independent, objective, accurate and reliable capital and o p e r a t i n g cost

assessments usable for investment funding and project control; and

• To analyze investment and development for the guidance of owners, financiers and
contractors.
• Estimates of capital or assets costs including development costs
• Estimates of operating and manufacturing costs through an asset’s life cycle
• Risk assessment and analysis
• Trending of scope and cost changes
• Decision analysis
• Financial analysis (e.g net present value, rate of rate of return etc)
• Project cost Control
• Appraisals of existing assets
• Project analyses, databases, and benchmarking
• Planning and Scheduling
• Sitting studies etc.
• Productive and investment needs assessment
• Facility management needs assessment
• Project feasibility and budget assessment
• Cost management
• Procurement management
• Contract administration
• Whole-life appraisals;
• Quality audits
• Value management and
• Dispute resolution

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5.2 SCOPE
In its broadest sense cost engineering is that area of engineering principles where
engineering judgment and experience are utilized in the application of scientific
principles and techniques to problems of cost estimating cost control profitability
analysis, project management, and planning and scheduling. In addition, cost
engineering embraces the principles of several disciplines and branches into business
planning, management science, optimization, operations research, accounting, and
economics, among others. Cost engineering covers a wide range of topics as listed in
component topics in cost engineering.

5.3 PART I SUPPORTING SKILLS AND KNOWLEDGE

Computer operations
Time value of money
Operations research
Forecasting theory
Statistics and probability
Behavioural science
Basic business and finance Motivational management
Oral and written Communication
Metric-English units Conversion

5.4 PART II COST ESTIMATING AND COST CONTROL

Manufacturing Capital cost
Engineering Maintenance
Construction Revamp
Operations Decommissioning

5.5 PART III PLANNING AND SCHEDULING AND PROJECT MANAGEMENT

Organizational structures
Quality management
Integrated project contract
Resource management
Time management Personnel
Scheduling Materials
Schedule control Equipment and tools
Forecasting Contract administration
Cost Management Societal/legal influence
Budgeting
Forecasting

Hands on assignment, practical examples on organizational structure should be included etc

5.6 PART IV ECONOMIC ANALYSIS AND BUSINESS PLANNING

Value engineering Profitability
Depreciation Appraisal
Comparative studies Life cycle costing
Constructability Risk analysis

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5.7 THE DIVERSE WORKS OF COST ENGINEERS INCLUDE:
• Cost Estimating
• Cost Control
• Cost Planning
• Conceptual Studies
• Value Engineering
• Constructability Studies
• Project Cash Flow Projection
• Independent Check Estimates
• Liquidated Damages Assessment
• Project Cost Variation
• Project Cost Fluctuation
• Negotiation Support
• Review of Contract time extension request
• Claims Management/Avoidance
• Construction Management
• Project Management
• Customs Destination Inspection
• Insurance Assessors/Loss Adjusters
• Project Scheduling
• Risk Analysis/Management
• Life Cycle Cost Analysis
• Value Analysis/Management
• Planning/Budget Estimates
• Profitability Analysis of Engineering Project and Process

5.8 THE CE PROVIDES INFORMATION BY:

• Estimating costs and analysis risk
• Trending and controlling costs and assessing design; and
• Documenting costs

5.9 COST PLAN

A cost plan (detail cost of each engineering system) provides the means of controlling the
design so that the complete scheme may be built within the approved budget.

Monitoring of the cost plan enables the Cost Engineer to detect at any time during the
project if the budget is exceeded or to take immediate remedial action before planning
and design process proceeds further.

At each phase of the project, the cost plan is updated and the design managed so that the
budget is not exceeded. Cost plan also provides basis for comparison of alternative
designs/options. A properly prepared/monitored cost plan gives the project Stakeholders
confidence that it is “on the right track” in respect of costs.

5.10 SCHEDULING
Scheduling is an essential part of successful cost engineering management from start to

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 completion of projects. Attention to details is important in scheduling to ensure that as
far as reasonably practicable that careful consideration is given to constraints as site,
climate and manpower. A properly prepared schedule must reflect the project parameters.

5.11 RISK ASSESSMENT

An assessment of the likely cost and risk is made taking account of past experience with
similar activities and the assessment of associated trends, and of any changes in working
practices and productivity gains.

6.2 TIME VALUE OF MONEY

This concept assigns progressive future time value for money invested in assets, stocks, etc
Money available now has more value (What goods and services it can buy) than the same
amount a year later. So, time alters the worth or value of money, propelled by
economic factors. An amount of money spent today ha an equivalent worth a year or
more after. A car bought at N100,000 five years ago may cost higher today. The new cost
could be said to be the subjective present worth of the N100,000. But objective present
worth is subject to a stipulated interest rate.

6.3 EQUIVALENCE
Different sums of money that have equal value over an interest period are said to
equivalent. That is, a principal and principal-plus-interest are equivalent.

7.00 COST INDEXES

A cost index is a dimensionless number used to adjust the cost of an item from one time
period to another. The adjustment is necessary because of the changing value of money
with time.
To convert costs from one time period to another, we use the following relationship.

C2 = C1 Index 2
Index 1 ………………………… (1)
Where C1 = Initial Cost in first year
C2 = Future Cost in future year
Index1 = Index in first year
Index2 = Index in further year

Example 1 A project built in 1986 at a cost of N800m. the index for this project in 1986
was 238. What would the project cost in 1989 if the index in 1989 is 320?

Solution: From equation (1)

320
800 𝑥 = 𝑁1,076𝑚 = 𝑁1.076
238

More examples/take home can be given for participants

8.1 ESTIMATING VERSUS BIDDING

Determining the selling price for a job is actually two separate components. The first

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 component is called the estimate, which determines the cost of the job. The second
component is the bid, which determines the job’s selling price. It is critical that you
understand the difference between an estimated cost and a bid price. Estimating is
determining your cost and bidding is determining the selling price.

8.2 ESTIMATING
The purpose of estimating is to determine the cost of a project before you actually do the
work. Estimating must take into consideration variable job conditions, the cost of
materials, labor cost, direct job expenses, and management costs (overhead).

8.3 BID PROCESS

Once you know the estimated cost of a project, you can determine the selling price of the
job. Determining the selling price of a job is called bidding.

8.4 COMPETITIVENESS
Control overhead expenses to keep them to a minimum. Factors that affect a contractor’s
competitiveness include:
1. Competition
2. Cost of material (buying power)
3. Experience
4. Labor cost and productivity
5. Management skills
6. Overhead
7. Selling the job at your price

9.1 DUTIES AND RESPONSIBILITIES OF THE ESTIMATOR

While the duties of estimators may vary from contractor or contractor, the basic
principles remain the same. Generally, the duties of the estimator include but are not
limited to:
1. Determining the cost of the job (estimate)
2. Purchasing material
3. Insuring bid accuracy
4. Project management/tracking

The estimator must develop a system to insure that the bid is accurate, and verify that
errors in the estimate have not been made.

10.1 ESTIMATING AND BID PROCESS

1. Understanding the scope of work
2. The Take-off
3. Determining the bill of material
4. Pricing and laboring material
5. Extending and totaling
6. The estimate summary
7. Applying profit and other costs.
8. Bid accuracy and bid analysis

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 Computer applications in estimation like Microsoft Excel can be included

11.1 DIRECT JOB EXPENSES

Direct job expenses are expenses often not shown the blueprints, but probably indicated
in the specifications. The failure to consider direct job expenses result in these costs
being absorbed out of profits. On sider the following expenses and be sure you have
included their cost in the estimate.

1. As-built plans
2. Business and occupational fees (B&O)
3. Engineering/working drawings
4. Equipment rental
5. Field office
6. Fire seals
7. Guarantee
8. Insurance
9. Miscellaneous material items
10. Mobilization
11 HSE compliance
12. Out of town expenses
13. Parking fees
14. Permits and inspection fees
15. Public safety
16. Recycling fees
17. Storage/storage handling
18. Sub-contract expenses
19. Supervision cost
20. Temporary wiring
21. Testing and certification fees
22. Trash disposal
23. Unity charges and fees

12.1 BID ACCURACY

To assure that your bid is accuracy you must verify that you have not made any of the
following errors in the estimate:
o Assuming standard grade devices, when specification grade is required.
o Errors in multiplication or addition
o Failing to include outside or underground work
o Failure to determine job site conditions, especially for retrofit jobs
o Failure to comply with the specifications or blueprint notes.
o Forgetting a major item, such as a switchgear quote.
o Forgetting to include special equipment
o Forgetting to include changes to the original specifications or blueprints.
o Leaving a page out of the total
o Not double checking all figures

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 o Not transferring totals to the summary worksheet properly.
o Omitting a section of the estimate
o Thinking that typical floors 6-12 is six flows when it’s seven floors
o Using improper estimating forms
o Using supplier take-off quantities for quotes
o Relying on verbal supplier quotes
o Wrong extensions or totals
o Wrong scale on reduced blueprints
o Wrong unit for labor –unit
o Wrong unit for material cost

A computer programme or software can be developed. This will eliminate errors

13.1 COST CONTROL

1. Explain each of the following terms and given data relating to an example
project calculate them:
a. Budgeted cost of work scheduled (BCWS) b
Budgeted cost of work performed (BCWP)
c. Actual cost of work performed (ACWP)
d. Budget at completion (BAC)
e. Estimate at completion (EAC)
f. Schedule variance (SV)
g. Cost variance (CV)

14.1 LIFE CYCLE COSTING

The 21st century engineering design concept is now based on the economic life cycle cost,
in preference to the cheapest possible constructional design, hence Cost Engineers must
give careful consideration to the underlisted three “Rs”:
 Running Cost
 Repairs Cost
 Replacement Cost.

14.2 CHECKLIST FOR LIFE CYCLE COSTING

Purchase or manufacturing cost Benefits and penalties for quality
Transportation cost Salvage value
Installation cost Distribution expense
Direct costs General and administrative
Indirect costs Expense
Maintenance Conformity with trends
Inventory for materials Safety and ecological
Inventory for parts Considerations
Periodic overhauls Governmental rules and
Supervision Regulations
Service reliability Uncertainty and Risk

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 15.1 DIRECT AND INDIRECT COSTS

COST ESTIMATE

DIRECT COST INDIRECT COST

LABO MATERIA EQUIPME SUBCONTR TAXES GEN. COND. RISK

OVERHEAD
R L NT ACT

PROFIT CONTINGENCY

15.2 DIRECT COSTS are the costs of all permanent equipment, materials, labor and
other resources involved in the fabrication, erection, and installation of the
permanent facilities.

15.3 INDIRECT COSTS are all costs other than direct costs which do not become a
permanent part of the facilities but are required for the orderly completion of
the project. These may include, but are not limited to, construction management,
start-up costs, fees, insurance, and taxes.

REFERENCES
st th
1. ACostE (1994) Cost Management for the 21 Century – 13
International Cost Engineering Congress
2. Michael Holt (1997) Electrical Estimating
3. Mbelede C (2003) Cost Engineering Practice: Nigeria as a Case
Study Presented/published at the Nigeria Society of Engineers
Annual General Meeting (LAGELU 2003) Ibadan
4. Mbelede C (2005) Basic Engineering Economics. Compulsory Refresher
Course for Prospective Corporate Members of the Nigerian
Society of Engineers.
st
5. Mbelede C (2010) Cost Engineering Practice in 21 Century Nigeria – The
Appraise and Cost Engineer Journal of the Institute of Appraises
and Cost Engineers (IACE)
6. ICEC - The International Cost Engineering Council www.coste.org
7. Jelen’s Cost and Optimization Engineering Third Edition by Kenneth K.
Humphreys, PE CEE (ED) American Association of Cost Engineers
NOTE
Instructors must be people that are practically involved
This must be made interactive with pictures, video clips, figures, charts etc where applicable

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